Beleaguered footwear specialist Footasylum (LON:FOOT) today re-iterated the profit warning it gave way back in September. We wrote about the profit warning back then, when it took off 50% the share price. Today’s fresh warning had a more muted effect: in initial trading down 25%, but the share price has recovered somewhat since then:
One reason for the reduced effect is that this was largely expected by the market: it would have been quite a turnaround for this to be reversed so quickly. The valuation of the company now stands at a mere £29m – on IPO this was worth almost 10 times as much. It is likely that any long-term investors will be massively disappointed, although at these prices there may well be some upside.
The winter season has been a mixed one for retailers. Next (LON:NXT) have posted some good figures, whilst ASOS (LON:ASOS) have shown some problems growing their business. It seems almost certain that 2019 will see some more marginal retailers bite the dust, particularly those who are heavily exposed to the high street.
The warning comes in the trading update:
The challenging trading conditions reported in the first half have continued throughout the Christmas trading period. UK economic uncertainty and weakening consumer sentiment have led to some of the most difficult trading conditions seen in recent years.
Against this market backdrop, promotional activity and discounting across the retail sector were higher than anticipated, with the result that Footasylum’s levels of promotional and clearance activity were greater than expected during the period. Consequently, while the Company has sustained its revenue growth across all channels, gross margin has been lower than previously expected for the period. Therefore, while Footasylum continues to expect to report FY19 revenue in line with consensus expectations, FY19 gross margin is now expected to be lower than current consensus expectations.
Much of this was known already, although with Superdry reporting an unseasonably warm winter this should have helped the footfall figures.
We saw in the last analysis that Footasylum did have some cash left but were burning it through capex so the next part would not be too much of a surprise:
The Board continues to maintain its strong focus on cash and working capital management. Inventory was carefully managed throughout the period, with inventory balances ending the period only fractionally higher year on year. Footasylum remains (and expects to remain) in compliance with the covenants of its £30 million multi-currency revolving credit facility
The statement concludes:
Reflecting this focus, and the lower gross margin performance, the Board is implementing a cost reduction plan across the business which may result in some exceptional costs in FY19. Footasylum now expects to report an adjusted EBITDA for FY19 towards the lower end of the current range of analyst forecasts.
No figures are given here to what these expectations are, but the previous statement said that guidance was for less than half of FY18 (£12.5m), so the figures could be less than £6m. And this is only EBITDA: the reality will be far worse because of the mention of the ‘exceptional’ costs (which will be likely to be incurred regularly as Footasylum optimise their stores mix.
Much of the business was written about in the previous update, and not much has changed in the past few months. The question is, does the update provide a better statement of prospects? The good news is that sales are still growing:
The stores figures are harder to interpret, because they are still opening new stores so such figures are not like-for-like. The online and wholesale figures are good though, albeit coming from a lower base. Most Footasylum sales still come from their stores. And underscoring this is the backdrop of promotional activity. It is quite simple to boost the sales figures simply by undercutting prices lower than others, this is particularly so in commodity areas – after all, Footasylum sell trainers that could be bought at other places.
The comment about covenants is a worrying one. The last profit warning included the comment:
The Board believes that upsizing certain stores will materially improve Footasylum’s existing strong brand relationships while enhancing the consumer experience in store. Reflecting this investment, capital expenditure and associated depreciation is expected to increase in the medium-term, with capital expenditure peaking at around £16 million in FY19.
Cash balances were £11.4m in February 2018, so it seems likely that this will come under some strain if capex is not reduced. Their revolving facility is £30m, so it does seem likely that a lot of headroom will remain, but a continued poor performance would lead to reduced EBITDA which may threaten the covenants. At the current stage of business there does not seem much options for more cash: a rights issue is not likely to be great given the share price.
In the original profit warning this was rated as 1/5. Has the latest update changed anything? Cautiously we might have to say the news could be good. We knew that margins were under pressure, and the good news is that overall revenues are still increasing, albeit at the expense of margins. We could say the upside has increased, because the share price is 27p today as opposed to 43p back then.
What doesn’t change is that this is a business under severe pressure. The challenges facing retailers of their like have been well publicised by various firms: greater competition leading to lower prices, lower footfall on the high street, rising input costs. Yet it is not really clear if Footasylum have some initiatives in place to arrest the slide. Cutting prices, increasing promotional activity and reducing back office costs certainly helps in the short-term, but in the long-term it is unsure where the source of above average returns for Footasylum would come from.
The past year has seen five store openings and three upsizes, which would have impacted on the cash balances. Whilst they are not facing a cash crisis, it does mean that it is likely that come February all the money from the IPO will be gone. The very narrow strip of redemption I feel lies within the success of their own-brands, but with in a market filled with fast moving competitors this will be very difficult.
At present this is a coin flip: over the period of a couple of years it is entirely possible that an investment will disappear with no dividends. But if FY20 is the year that Footasylum gets back on track the share price could easily be a lot higher than the present level, although I doubt it will be back to where it was, with it’s growth projections largely discredited by now.